Starting Small and Renegotiation

UCSD Economics Discussion Paper 97-17

40 Pages Posted: 3 Apr 1998

See all articles by Joel Watson

Joel Watson

University of California, San Diego (UCSD) - Department of Economics

Date Written: July 1997

Abstract

This paper develops a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. An equilibrium in which the partners "start small" is studied and shown to be uniquely selected by a strong renegotiation condition. The characterization offers new insights on how relationships change as parties learn about each other and on qualitative differences between situations of one- and two-sided incomplete information. In particular, stakes rise and types separate faster in the two-sided case. The equilibrium is shown to have other intuitive properties as well.

JEL Classification: C73, C78, D82

Suggested Citation

Watson, Joel, Starting Small and Renegotiation (July 1997). UCSD Economics Discussion Paper 97-17, Available at SSRN: https://ssrn.com/abstract=73468 or http://dx.doi.org/10.2139/ssrn.73468

Joel Watson (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-6132 (Phone)
619-534-7040 (Fax)